RNS Number:7790T
Tescom Software Systems Testing Ltd
27 March 2007
Tescom Software Systems Testing Ltd. ("Tescom" or "the Company")
Preliminary Results
Tescom Software Systems Testing Ltd. (Symbol: TSCM), the international quality
assurance and software testing service provider, announces its full-year results
for the 12 months ended 31 December 2006.
Highlights
* Revenues increased by 15.0% to $53.4m, versus $46.5m in 2005
* Profit before tax was $3.0m, versus a pre-tax loss of $0.1m in 2005
* Diluted earnings per share were $0.15, versus a loss per share of $0.07
in 2005
* Solid profitability improvement in all key territories
* Significant progress on landmark transaction as main contractor with the
Ministry of Finance in France
* Strengthening of senior sales and delivery management in the UK, US and
Israel
* Continued emphasis on European activities, which now comprise 52% of
consolidated revenues
Ofer Albeck, CEO of Tescom, said: "Tescom's results for the year ended 31
December 2006 reflect a significant increase in revenues over 2005, particularly
in the UK and in France, which now represent 52% of our consolidated revenues.
We look forward to a continuing positive trend in our top line, as we see the
benefit of the reorganization and strengthening of our senior sales and
management team. The market in Israel remains extremely competitive, which has
had a negative effect on our gross margins and profitability. In addition, the
loss of a major customer in Australia at the end of 2005 also affected
profitability in 2006.
Despite this, Tescom has won a number of major new contracts, from which we
expect to benefit during 2007. We expect to leverage the infrastructure
improvements which we put in place during 2006 in order to achieve consistent
and sustainable growth in both revenues and profitability in 2007 and 2008. In
addition, we continue to consider various strategic initiatives that will drive
growth and bring long-term value to our shareholders."
Enquiries:
Tescom
Ofer Albeck, CEO + 972 3 535 0990
Phil Serlin, VP Finance + 972 3 535 0990
Teather & Greenwood
Tom Hulme +44 (0)20 7426 9593
Chief Executive's Review
We are pleased to report that Tescom's revenues for the year ended 31 December
2006 increased by 15.0% from 2005, to $53.4m. Revenues increased in the UK,
Continental Europe, Israel and in the Asia-Pacific region, mainly as a result of
new large contracts in each of these locations, as well as a continued emphasis
on improved management of existing accounts. Tescom's strategy is to continue
focusing its efforts on large projects with fixed-price contracts, mainly in
Europe and the US. The Company's three-year contract with the French Ministry of
Finance has proceeded according to plan and we are confident that it will
continue to do so. We hope to leverage our experience in this area in order to
position ourselves to benefit from other public sector projects throughout
Europe in 2007.
We are particularly pleased to report significant revenue increases in Europe,
which now represents 52% of our consolidated revenues. France more than doubled
its revenues in 2006 in comparison to 2005. In the UK, revenues have increased
by over 15%, and Tescom has been successful at gaining new contracts in both the
private and public sector. In early 2006, BSkyB made Tescom their principal
supplier for testing across the UK, and Vodafone announced its continuing
relationship with Tescom, including the successful project regarding their "push
e-mail" service.
Revenues in the US decreased by approximately 11% in 2006, mainly as a result of
significant changes in local management during the first half of 2006.
Nevertheless, Tescom continues to make progress in the US, and has won several
new long-term contracts in the state and local government sector and the
financial services sector. In addition, the strengthening of new senior sales
and delivery management in the US is expected to have a positive effect on 2007
revenue and profitability.
In the Asia-Pacific region, Tescom Singapore won a new contract with the Land
Transport Authority of Singapore and Tescom Australia signed a new contract with
the Victorian State Government. Revenues for 2006 increased by 23% over 2005,
mainly from a substantial increase in Singapore revenues, which was partially
offset by a decline in Australian revenues due to the completion of a large
contract with a major customer in 2005.
Tescom Israel has shown a slight increase in revenues over 2005, primarily due
to several new large contracts at top-tier customers in the Israeli market.
These wins were partially offset by a reduction in activity in the defence
sector. The market continues to be very competitive, which is reflected in lower
gross margins. Despite this, operating profitability significantly improved over
2005, primarily as a result of a cost reduction programme instituted towards the
end of 2005. The Company has been successful in gaining new contracts in the
finance sector, including specifically -the insurance market, and is the Israeli
market leader in the testing of ERP project implementations. These areas, as
well as a new framework contract in the defence sector, are expected to be key
engines of growth in 2007 in an otherwise very competitive market.
Since the beginning of 2006, we have also placed significant emphasis on
strengthening our Global Executive Management Team. We are pleased with our
progress in 2006 and we expect to leverage the infrastructure improvements which
we put in place during 2006 in order to achieve consistent, sustainable growth
in both revenues and profitability in 2007 and 2008. Tescom had a difficult year
in 2005 and I wish to thank our employees for their efforts, which contributed
to a solid performance in 2006.
Financial Review
Results
Revenues increased by 15.0% for the 12 months ended 31 December 2006, to $53.4m
from $46.5m in 2005, primarily resulting from significant increases in the UK
and France.
Gross margins decreased during the year, to 33.0% in 2006 from 36.2% in 2005.
The erosion in gross margins in 2006 resulted primarily from competitive
pressures in Israel, as well as a less profitable contract mix in the US. This
situation stabilized during the second half of 2006.
Pre-tax profit amounted to $3.0m, versus a loss of $0.1m in 2005 (profit of
$2.2m, net of one-off expenses related to the Company's AIM introduction and the
write-off of goodwill in 2005). Despite the significant increase in revenues,
gross profit increased by 4.8% from the 2005 period, mainly as a result of
increased competition in Israel and the completion of a high-margin contract in
Australia in 2005. G&A expenses decreased by $2.0m in 2006, to $11.4m from
$13.4m in 2005. This decrease primarily relates to the aforementioned write-off
of goodwill and indirect costs associated with the AIM introduction in 2005, as
well as $0.5m of one-off gains associated with the Group's stock option schemes
in 2006. Sales and marketing expenditure increased by 15.6% during 2006, to
$3.1m, from $2.7m in 2005.
The Company's results were also negatively impacted by an increase in financial
expenses of $0.3m, due to exchange rate differences between the dollar and the
other operating currencies in the various Group locations, as well as increased
borrowing costs on its short-term bank debt. The decrease in other expenses of
$1.0m relates to direct costs associated with the AIM introduction in 2005
mentioned above.
The Company generated $0.4m in cash from operating activities in 2006, versus
$1.5m in 2005. The reduction in operating cash flows results primarily from an
increase in trade receivables, which is mainly due to the Company's increased
turnover, as well as longer trade terms on certain government fixed-price
contracts. The Company's cash balance at 31 December 2006 was $2.1m, which also
reflects the payment of a $1.1m dividend in January 2006. The Company maintains
short-term bank credit lines in both Israel and the UK in the aggregate amount
of approximately $7.0m, against which $2.4m had been drawn as of 31 December
2006.
Share Buyback
The Board of Tescom announced in July 2005 that it had approved a share buyback
of its ordinary shares on the open market. In November, the buyback programme
was extended to 31 March 2006. The total amount approved for the share
repurchase was approximately $0.6m. From the July 2005 approval to 31 December
2006, 229,671 shares were bought back by the Company for a total sum of
approximately $0.3m. These shares are held as treasury shares by the Company.
Dividends
The Company's dividend policy is subject to the future performance of the
Company and its funding requirements. The Company declared a dividend of $1.1m
in the fourth quarter of 2005, which was paid in January 2006. The Board is
pleased to recommend a final dividend of $0.9m ($0.057 per ordinary share) on
account of 2006. This will be paid on May 2, 2007, to shareholders on the
register at April 17, 2007.
Outlook
Tescom has won a number of significant long-term contracts in 2005 and 2006.
These new contracts have positively affected the top line in 2006 and this trend
is expected to continue into the first half of 2007. The Company also expects to
benefit from its continued emphasis on the European market, which has higher
gross margins. Competitive pressures, particularly in the Israeli market, have
affected gross margins and operating profits to some extent, although there are
signs of improving performance. Tescom intends to focus efforts on increasing
gross margins, including assessing the feasibility of staffing certain projects
from less costly locations where suitable. We anticipate continuing the
year-on-year progress that has been achieved over the last four quarters.
The Board of Tescom continues to examine a number of strategic opportunities to
expand its businesses in its current territories and enhance shareholder value.
CONSOLIDATED BALANCE SHEETS
In thousands of US dollars
December 31,
Note 2004 2005 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 3 4,581 2,653 2,071
Short-term bank deposits 1,801 - -
Trade receivables 4 11,606 11,363 13,830
Other current assets and prepaid expenses 5 1,129 636 1,227
Total current assets 19,117 14,652 17,128
NON-CURRENT ASSETS:
Severance pay fund 2t 2,187 2,155 2,267
Property and equipment, net 6 507 1,100 1,661
Goodwill and other intangible assets 7 1,552 462 432
Deferred income taxes 13 841 1,008 1,379
Total non-current assets 5,087 4,725 5,739
Total assets 24,204 19,377 22,867
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
In thousands of US dollars
December 31,
Note 2004 2005 2006
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term credit and current portion of long-term 8 2,063 1,650 2,506
loans
Trade payables 790 849 1,336
Income taxes payable 349 443 293
Other current liabilities and accrued expenses 9 5,851 6,412 6,868
Convertible debenture 10 4,451 - -
Dividend payable - 1,021 -
Total current liabilities 13,504 10,375 11,003
LONG-TERM LIABILITIES:
Long-term loans 11 - 17 252
Accrued severance pay 2t 2,372 2,427 2,691
Total long-term liabilities 2,372 2,444 2,943
EQUITY: 14
Share capital 48 51 51
Share premium 2u 8,676 10,881 10,480
Treasury shares, at cost - (173) (328)
Foreign currency translation reserve (582) (1,331) (732)
Equity component of convertible instrument 958 - -
Accumulated deficit 2u (772) (2,870) (550)
Total equity 8,328 6,558 8,921
Total liabilities and equity 24,204 19,377 22,867
The accompanying notes are an integral part of the consolidated financial
statements.
March 27, 2007
Date of approval of the Ofer Albeck Philip Serlin
financial statements CEO and Chairman of Vice President, Finance
the Board of Directors
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands of US dollars, except share data
Year ended December 31,
Note 2004 2005 2006
Revenues 45,759 46,461 53,437
Cost of revenues 16a 27,676 29,649 35,808
Gross profit 18,083 16,812 17,629
Operating expenses:
Selling and marketing 16b 3,452 2,699 3,121
General and administrative 16c 11,049 13,398 11,389
Total operating expenses 14,501 16,097 14,510
Operating profit 3,582 715 3,119
Financial income 16d 16 314 102
Financial expenses 16e (300) (133) (240)
Other expenses, net (450) (1,035) (4)
Profit (loss) before taxes on income 2,848 (139) 2,977
Taxes on income 13 1,071 938 657
Net profit (loss) 1,777 (1,077) 2,320
Basic and diluted earnings (loss) per share 15 0.11 (0.07) 0.15
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
In thousands of US dollars
Total
Foreign Equity compre-
Treasury currency component of hensive
Share Share shares, translation convertible Accumulated Total income
capital premium at cost reserve instrument deficit equity (loss)
Balance as of January 1, 2004 48 8,482 - (1,053) 958 (876) 7,559
Effect of adopting IFRS 2 - 194 - - - - 194 -
Issuance of shares (*) - - - - - - (*) - -
Shares repurchased by the - - (*) - - - - (*) - -
Company
Exercise of options (*) - - - - - - (*) - -
Foreign currency translation - - - 471 - - 471 471
adjustments
Dividends - - - - - (1,673) (1,673) -
Net profit - - - - - 1,777 1,777 1,777
Balance as of December 31, 2004 48 8,676 (*) - (582) 958 (772) 8,328 2,248
Share-based compensation - 446 - - - - 446 -
Shares repurchased by the - - (173) - - - (173) -
Company
Exercise of options 3 801 - - - - 804 -
Foreign currency translation - - - (749) - - (749) (749)
adjustments
Repayment of convertible - 958 - - (958) - - -
debentures
Dividends - - - - - (1,021) (1,021) -
Net loss - - - - - (1,077) (1,077) (1,077)
Balance as of December 31, 2005 51 10,881 (173) (1,331) - (2,870) 6,558 (1,826)
Share-based compensation - (401) - - - - (401) -
Shares repurchased by the - - (155) - - - (155) -
Company
Foreign currency translation - - - 599 - - 599 599
adjustments
Net profit - - - - - 2,320 2,320 2,320
Balance as of December 31, 2006 51 10,480 (328) (732) - (550) 8,921 2,919
(*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of US dollars
Year ended December 31,
2004 2005 2006
Cash flows from operating activities
Net profit (loss) 1,777 (1,077) 2,320
Adjustments to reconcile net profit (loss) to net cash provided
by operating activities:
Share-based compensation 194 446 (401)
Loss (gain) from forward transactions (31) (50) 39
Loss on sale of investment 4 - -
Accrued interest on short-term deposit (13) 13 -
Depreciation and amortisation 406 258 442
Impairment of goodwill - 945 -
Increase in accrued severance pay, net 51 101 121
Exchange differences on convertible debentures 190 229 -
Gain on sale of property and equipment (5) - -
Deferred income taxes, net 68 (206) (131)
Increase in trade receivables (968) (588) (1,279)
Decrease (increase) in other current assets and prepaid 154 426 (501)
expenses
Increase in trade payables 159 122 377
Increase (decrease) in other current liabilities and accrued 562 905 (618)
expenses
Net cash provided by operating activities 2,548 1,524 369
Cash flows from investing activities
Additions to property and equipment (140) (979) (462)
Proceeds from sale of property and equipment 9 128 -
Payments for forward transactions - (24) (60)
Proceeds from forward transactions 31 74 21
Investment in short-term bank deposits (1,718) - -
Proceeds from maturity of short-term bank deposits - 1,710 -
Net cash provided by (used in) investing activities (1,818) 909 (501)
Cash flows from financing activities
Short-term credit, net (600) (300) 576
Repayment of convertible debentures - (4,500) -
Exercise of options - 804 -
Shares repurchased by the Company - (173) (155)
Proceeds of long-term loans - 40 -
Repayments of long-term loans - (10) (20)
Dividends paid (1,673) - (1,050)
Net cash used in financing activities (2,273) (4,139) (649)
Effect of exchange rate changes on cash and cash equivalents 252 (222) 199
Decrease in cash and cash equivalents (1,291) (1,928) (582)
Cash and cash equivalents at the beginning of the year 5,872 4,581 2,653
Cash and cash equivalents at the end of the year 4,581 2,653 2,071
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of US dollars
Year ended December 31,
2004 2005 2006
(a) Supplemental disclosure of cash flow information:
Cash paid during the year for interest 173 23 180
Cash paid during the year for income taxes 640 483 1,679
Cash received during the year for interest 105 55 37
(b) Non-cash transactions
Property and equipment purchased with loan received - - 340
Dividends declared but not paid - 1,021 -
The accompanying notes are an integral part of the consolidated financial
statements.
TESCOM SOFTWARE SYSTEMS TESTING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands of US dollars, except share and per share data
NOTE 1:- GENERAL
a. Tescom Software Systems Testing Ltd. ("the Company"), incorporated in
Israel, commenced operations in 1990. The Company and its subsidiaries ("the
Group") are providers of quality assurance and testing services for electronic,
business and other software applications. The Company's shares are traded on
both the AIM market in London and on the Tel Aviv Stock Exchange.
b. Definitions:
The terms set forth below have the following definitions in these financial
statements:
The Company - Tescom Software Systems Testing Ltd.
The Group - Tescom Software Systems Testing Ltd. and its subsidiaries, as
fully detailed in Note 2(d).
Subsidiaries - companies over which the Company exercises control (as defined
in IAS 27) and whose accounts are consolidated with those of the Company.
Related parties - as defined in IAS 24.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. Basis of preparation:
The consolidated financial statements of the Group herein have been prepared in
accordance with International Financial Reporting Standards ("IFRS") on the
historical cost basis, except for financial instruments, which are stated at
fair value.
b. Use of estimates:
The preparation of financial statements in accordance with IFRS requires
estimates and assumptions by management that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses and other amounts stated in the statement of operations
during the reported period. The actual results could differ from those
estimates. The key assumptions concerning the future and other key sources of
estimation uncertainly at the balance sheet date, that have a significant risk
of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, are as follows:
Impairment of goodwill
The Group determines whether goodwill is impaired on at least an annual basis.
This requires an estimation of the "value in use" of the cash-generating units
to which the goodwill is allocated. Estimating a value in use amount requires
management to make an estimate of the expected future cash flows from the cash
generating unit and also to choose a suitable discount rate in order to
calculate the present value of those cash flows. The carrying amount of goodwill
as of December 31, 2006 was $ 354. Further details are given in Note 7.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Deferred tax assets
Deferred tax assets are recognised for all unused tax losses to the extent that
it is probable that taxable profit will be available against which the losses
can be utilised. Significant management judgment is required to determine the
amount of deferred tax assets that can be recognised, based upon the likely
timing and level of future taxable profits together with future tax planning
strategies. The carrying value of recognised tax losses at December 31, 2006 was
$ 1,175. Further details are contained in Note 13f.
c. Functional currency and translation:
The majority of the revenues of the Company and its subsidiaries that operate in
Israel ("the Israeli companies") are received in New Israeli Shekels ("NIS").
The NIS is the currency of the primary economic environment of the Israeli
companies and, therefore, the functional currency of the Israeli companies.
The Group has selected the US dollar as the presentation currency, rather than
using its functional currency, since the Group believes that most of the readers
of its financial statements are more familiar with the US dollar than the NIS.
Since the Group selected the presentation currency to be the US dollar, the
financial statements of the Group have been translated from the functional
currency to the presentation currency in accordance with the principles set
forth in IAS 21, as follows:
Assets and liabilities of the Israeli companies and of the foreign subsidiaries
whose functional currency is not the US dollar are translated into US dollars at
the closing rate at the date of each balance sheet. Issued capital, share
premium and other reserves are translated into US dollars using the exchange
rate on the date of the transaction. Income and expenses are translated at
average monthly exchange rates. Translation differences resulting from the
translation are recognised as a separate component of equity ("foreign currency
translation reserve").
d. Scope of consolidation:
The consolidated financial statements as of December 31, 2006 include the
financial statements of the Company and the following wholly owned subsidiaries
(except for Manna which is 99.9%-owned and Tescom Singapore, which is
96%-owned):
Tescom (UK) Software Systems Testing Ltd. Tescom UK
Tescom (USA) Software Systems Testing Inc. Tescom USA
Tescom (Singapore) Software Systems Testing PTE Ltd. Tescom Singapore
Tescom (Spain) Software Systems Testing S.L. Tescom Spain
Tescom Australasia Pty Ltd. Tescom Australia
Tescom (France) Software Systems Testing SARL Tescom France
Tescom Software Systems Testing (Deutschland) GmbH Tescom Germany
Manna Network Technologies Ltd. Manna
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
During 2006, the Company converted $ 900 of intercompany loans due from Tescom
Singapore into new share capital of Tescom Singapore. As a result of this
transaction, the Company's share of Tescom Singapore increased to 96%. There was
no material goodwill recorded on this transaction. Prior to the above
transaction, the Company recorded 100% of Tescom Singapore's losses in its
consolidated financial statements, since the minority interest was not obligated
to cover the losses.
The Company has also recorded 100% of Manna's losses in its consolidated
financial statements, since the minority interest is not obligated to cover the
losses.
e. Principles of consolidation:
Subsidiaries are consolidated from the date on which control is transferred to
the Group and cease to be consolidated from the date on which control is
transferred out of the Group. The acquisition of subsidiaries is accounted for
using the purchase method of accounting.
Intercompany balances and transactions, including profits from intercompany
transactions not yet realised outside the Group, have been eliminated in
consolidation.
The financial statements of the subsidiaries are prepared for the same reporting
periods as the Company, using consistent accounting policies.
f. Cash equivalents:
The Group considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
g. Short-term deposits:
The Group classifies deposits with original maturities of between three months
and one year as short-term deposits. The short-term deposits are presented at
cost, including accrued interest. The short-term deposit on the balance sheet as
of December 31, 2004 had an effective annual interest rate of 1.65%.
h. Interest-bearing loans and borrowings:
All loans and borrowings are initially recognised at the fair value of the
consideration received, less directly attributable transaction costs. After
initial recognition, interest- bearing loans and borrowings are subsequently
measured at amortised cost using the effective interest method. Gains and losses
are recognised in the statement of operations when the liabilities are
derecognised, as well as through the amortisation process.
i. Trade receivables:
Trade receivables are recognised and carried at their original invoice amount,
less an allowance for any uncollectible amounts.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j. Allowance for doubtful accounts:
The allowance for doubtful accounts is computed for specific accounts, the
collectibility of which is doubtful. In addition, the Company records a
provision for impairment in respect of customers groups on a collective basis,
based on their credit risk characteristics. Impaired accounts --are written-off
when it is determined that they are no longer collectible.
k. Work in progress:
Work in progress is comprised of the cost of direct labour and a proportion of
overheads, but excluding borrowing costs.
l. Property and equipment:
Property and equipment are presented at cost, net of accumulated depreciation
and impairment. Cost consists of the aggregate amount paid and the fair value of
any other consideration given to acquire the asset, including costs directly
attributable to making the asset capable of operating as intended. Depreciation
is calculated using the straight-line method over the estimated useful lives of
the assets, at the following annual rates:
%
Computers and peripheral equipment 33
Office furniture and equipment 6 - 15 (primarily 7%)
Motor vehicles 15
Leasehold improvements Over the term of the lease or life
of asset, whichever is shorter
An item of property and equipment is derecognised upon disposal or when no
future economic benefits are expected from its use or disposal. Any gain or loss
arising on derecognition of the asset (calculated as the difference between the
net disposal proceeds and the carrying amount of the asset) is included in the
statement of operations in the year the asset is derecognised.
m. Borrowing costs
Borrowing costs are recognised as an expense when incurred.
n. Government grants
Royalty-bearing grants for funding of approved research projects are recognised
as a liability upon receipt. The liability is reviewed at each balance sheet
date to determine whether there is reasonable assurance that part or all of the
grants received will not be repaid based on estimated future sales. If there is
such assurance, part or all of the liability is recorded as income. If, at
subsequent balance sheet dates, the Company revises its estimated future sales,
the liability for any amounts previously included as income is restated, with a
corresponding loss in the statement of operations.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
o. Impairment of assets:
The carrying values of non-current assets are reviewed for impairment when
events or changes in circumstances indicate the carrying value may not be
recoverable. If any such indication exists, and the carrying values exceed the
estimated recoverable amount, the assets or cash-generating units are written
down to their recoverable amount. The recoverable amount is the greater of the
net selling price and the value in use. In assessing the value in use, estimated
future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the
risks specific to the asset. For an asset that does not generate largely
independent cash inflows, the recoverable amount is determined for the
cash-generating unit to which the asset belongs.
An assessment is made at each reporting date as to whether there is any
indication that previously recognised impairment losses may no longer exist or
may have decreased. If such indication exists, the recoverable amount is
estimated. A previously recognised impairment loss is reversed only if there has
been a change in the estimates used to determine the asset's recoverable amount
since the last impairment loss was recognised.
If such is the case, the carrying amount of the asset is increased to its
recoverable amount.
That increased amount cannot exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been recognised for the
asset in prior years. Such reversal is recognised in profit or loss unless the
asset is carried at a revalued amount, in which case the reversal is treated as
a revaluation increase.
After such a reversal the depreciation charge is adjusted in future periods to
allocate the asset's revised carrying amount, less any residual value, on a
systematic basis over its remaining useful life.
p. Goodwill:
Goodwill on acquisition is initially measured at cost, defined as the excess of
the cost of the business combination over the acquirer's interest in the net
fair value of the identifiable assets, liabilities and contingent liabilities.
Following initial recognition, goodwill is measured at cost less any accumulated
impairment losses. Goodwill related to acquisitions prior to January 1, 2002, is
not amortised after January 1, 2002, the date of the Group's transition to IFRS.
Goodwill relating to acquisitions from January 1, 2002 and thereafter is not
amortised. Goodwill is reviewed for impairment on an annual basis, or more
frequently, if events or changes in circumstances indicate that the carrying
value may be impaired.
At the acquisition date, any goodwill acquired is allocated to each of the
cash-generating units expected to benefit from the combination's synergies.
Impairment is determined by assessing the recoverable amount of the
cash-generating unit to which the goodwill relates. If the recoverable amount of
the cash-generating unit is less than the carrying amount, an impairment loss is
recognised. If goodwill forms part of a cash-generating unit and part of the
operation within that unit is disposed of, the goodwill associated with the
operation is included in its carrying amount when determining the gain or loss
on disposal of the operation. Goodwill disposed of in this circumstance is
measured on the basis of the relative values of the operation disposed of and
the portion of the cash-generating unit retained.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
q. Other intangible assets:
Other intangible assets, which are presented at cost, consist of acquired
know-how. These amounts are amortised using the straight-line method over the
estimated useful life of the assets, which is five years.
r. Convertible debentures:
Upon issuance of convertible debentures, the liability and equity components are
measured separately. The fair value of the liability component is determined
using the market rate for an equivalent non-convertible bond (which was 6.25% at
the date of issuance). The fair value of the conversion option (equity
component) is determined using an option pricing model. The proceeds received
upon issuance, net of issuance costs, are allocated pro-rata to the liability
and equity components based on the calculated fair value.
The liability component, as determined above, is carried as a long-term
liability on the amortised cost basis until extinguished on conversion or
redemption. The equity component is recognised and included in equity. The value
of the conversion option is not changed in subsequent years.
Issuance costs are apportioned between the liability and equity components of
the convertible debentures based on the allocation of proceeds to the liability
and equity components when the instruments are first recognised.
s. Deferred income taxes:
Deferred income taxes are provided using the liability method on temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable temporary
differences, except:
1. where the deferred income tax liability arises from the initial
recognition of goodwill, or of an asset or liability, in a transaction that is
not a business combination and, at the time of the transaction, affects neither
the accounting profit nor taxable profit or loss; and
2. in respect of taxable temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, where the timing of
the reversal of the temporary differences can be controlled and it is probable
that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible temporary
differences, carryforwards of unused tax credits and unused tax losses, to the
extent that it is probable that taxable profit will be available against which
the deductible temporary differences, and the carryforwards of unused tax
credits and unused tax losses can be utilised, except:
1. where the deferred income tax asset relating to the deductible temporary
differences arises from the initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss;
and
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
2. in respect of taxable temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, deferred income tax
assets are recognised only to the extent that it is probable that the temporary
differences will reverse in the foreseeable future and taxable profit will be
available against which the temporary differences can be utilised.
The carrying amount of deferred income tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred
income tax assets to be utilised. Unrecognised deferred income tax assets are
reassessed at each balance sheet date and are recognised to the extent that it
has become probable that future taxable profit will allow the deferred tax asset
to be recovered. Deferred income tax assets and liabilities are measured at the
tax rates that are expected to apply to the year when the asset is realised or
the liability is settled, based on tax rates (and tax laws) that have been
enacted or substantively enacted at the balance sheet date.
Deferred income taxes relating to items recognised directly in equity are
recorded directly in equity as well.
Deferred income tax assets and deferred income tax liabilities are offset
if a legally enforceable right exists to set off current tax assets against
current income tax liabilities and the deferred income taxes relate to the same
taxable entity and the same taxation authority.
t. Accrued severance pay:
The liability for severance pay for Israeli resident employees is calculated
pursuant to the Israeli Severance Pay Law, based on the most recent salary of
the employees multiplied by the number of years of employment as of the balance
sheet date. Employees are entitled to one month's salary for each year of
employment (or a relative portion thereof). The liability is covered by monthly
deposits with severance pay funds, the purchase of insurance policies, and by
the accrual recorded on the balance sheet. The effect of actuarial gains and
losses on the severance pay obligation and the balance of deposited funds is
immaterial.
The deposited funds may be withdrawn only in accordance with the Israeli
Severance Pay Law or labour agreements.
u. Revenue recognition:
Most of the Group's revenues are derived from services provided under
time-and-material contracts, which are billed at contract rates, and are
recognised as the services are rendered over the duration of the contract.
Some of the Group's revenues are generated from fixed-price contracts, which are
recognised under the percentage-of-completion method.
The percentage of completion is measured by monitoring progress using records of
actual time incurred to date in the project, compared to the total estimated
project requirements. Estimates of total project requirements are based on prior
experience and are reviewed and updated regularly by management.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
A provision for estimated losses on uncompleted contracts is recorded in the
period in which such losses are first identified.
v. Share-based payment transactions:
On January 1, 2005, the Group adopted IFRS 2, "Share-based Payments." IFRS 2
requires an expense to be recognised where the Group buys goods or services in
exchange for shares or rights over shares ("equity-settled transactions"), or in
exchange for other assets equivalent in value to a given number of shares or
rights over shares ("cash-settled transactions"). The main impact of IFRS 2 on
the Group is the expensing of employee and director share options
(equity-settled transactions).
The cost of equity-settled transactions is measured by reference to the fair
value at the date on which they are granted. The fair value is determined using
the Black-Scholes option-pricing model, taking into account the terms and
conditions upon which the instruments were granted. In valuating equity-settled
transactions, no account is taken of any performance conditions, other than
conditions linked to the price of the Company's shares, if applicable.
The cost of equity-settled transactions is recognised, together with a
corresponding increase in equity, over the period in which the performance and/
or service conditions are fulfilled, ending on the date on which the relevant
employees become fully entitled to the award ("the vesting date"). The
cumulative expense recognised for equity-settled transactions at each reporting
date until the vesting date reflects the extent to which the vesting period has
expired and the best estimate of the number of equity instruments that will
ultimately vest. No expense is recognised for awards that do not ultimately
vest.
w. Leases:
Operating lease payments are recognised as an expense in the statement of
operations on a straight line basis over the lease term. The Group does not hold
any significant capitalised leased assets.
x. Derivative financial instruments:
The Group uses derivative financial instruments, such as forward exchange rate
currency contracts, to control its risks associated primarily with foreign
currency fluctuations. Such derivative financial instruments are stated at fair
value. The fair value of forward exchange contracts is calculated by reference
to current forward exchange rates for contracts with similar maturity profiles.
As the derivatives do not qualify for hedge accounting treatment, gains or
losses arising from changes in fair value are recognised in the statement of
operations.
y. Exchange rates:
Assets and liabilities in foreign currency, or linked thereto, are translated
into the functional currency, according to the representative exchange rate as
published by the Bank of Israel on the balance sheet date.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Data regarding exchange rates of the NIS and the Pound Sterling in relation to
the US dollar are as follows:
Exchange rate Exchange rate
As of of NIS 1 of US$ 1
in US dollars in Sterling
December 31, 2006 $0.236 # 0.513
December 31, 2005 $0.217 # 0.579
December 31, 2004 $0.232 # 0.518
z. Treasury shares
The Company's equity instruments which are reacquired by the Company
(treasury shares) are deducted from equity. No gain or loss is recognised in the
statement of operations on the purchase, sale, issuance or cancellation of the
Company's own equity instruments.
aa. Basic and diluted earnings per share:
Basic earnings per share have been computed using the weighted average number of
participating equity instruments (Ordinary shares) outstanding during the
period. Diluted earnings per share are computed based on the weighted average
number of participating equity instruments outstanding during each period, plus
dilutive potential Ordinary shares considered outstanding during the period.
ab. Future changes in accounting policies:
1. IFRS 7 Financial Instruments: Disclosure - IFRS 7 was issued in August 2005
and becomes effective for financial years beginning on or after January 1, 2007.
The Company plans to adopt IFRS 7 for its 2007 financial statements. It will
primarily affect the Company's disclosures relating to financial risk management
objectives and policies.
2. IFRIC 8 Scope of IFRS 2 - IFRIC 8 requires IFRS 2 to be applied to any
arrangements where equity instruments are issued for consideration that appears
to be less than fair value. As equity instruments are only issued to employees
and directors in accordance with authorised share option plans, the
interpretation is not expected to have any impact on the financial position of
the Group.
3. IFRS 8 - Operating Segments - IFRS 8 discusses operating segments and
replaces IAS 14. This standard applies to companies whose securities are listed
or undergoing listing for trade on any securities stock exchange, and will be
applicable to annual financial statements for periods commencing after January
1, 2009, although it may be applied early. The provisions of this standard will
be applied retrospectively, by restatement, unless the disclosure required is
unavailable or impractical to obtain.
IFRS 8 determines that an entity will adopt a management approach to segment
reporting. The information reported would be that which management uses
internally for evaluating the performance of operating segments and allocating
resources to those segments.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Information will also be provided regarding revenues derived from the entity's
products or services (or groups of products or services), the countries from
which the revenues or assets are derived, as well as principal customers,
regardless of whether management is using this information for making operating
decisions.
The Company believes that adoption of IFRS 8 is not expected to have a material
effect on its financial statements.
4. IFRIC 10 - Interim Financial Reporting and Impairment - IFRIC 10 disallows
the reversal of an impairment loss recognised in the past in the interim
financial statements with respect to goodwill, investments in equity instruments
or financial assets presented at cost. IFRIC 10 will be adopted in the Group's
financial statements beginning in 2007, and will apply to goodwill, investments
in equity instruments and financial assets presented at cost from the date on
which the Company first adopts the measurement principles of IAS 36 and IAS 39,
retrospectively.
The Company believes that IFRIC 10, to be adopted in 2007, will not have a
material effect on its financial statements.
5. IFRIC 11 - Group and Treasury Share Transactions - IFRIC 11 settles the
adoption provisions of IFRS 2 regarding share-based payment transactions in
respect of arrangements that include the Company's equity instruments and in
respect of arrangements that include the parent company's equity instruments.
This interpretation is to be adopted in annual financial statements for periods
commencing on or after March 1, 2007, and may be adopted early.
The adoption of this interpretation will be done retrospectively by restatement
according to the transitional provisions of IFRS 2. Companies that early adopt
IFRS for the first time will act according to the provisions of IFRS 1, "First
Time Adoption of IFRS".
The Company believes that adoption of IFRIC 11 is not expected to have a
material effect on its financial position, results of operations and cash flows.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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